A capital pool company (CPC) is an alternative way for private companies in Canada to raise capital and go public. The CPC uses its cash holdings to assess promising companies or properties that it would then purchase within 24 months following a qualifying transaction. The system was created and is currently regulated by the TMX Group, and the resulting companies trade on the TSX Venture Exchange in Toronto, Canada.
Understanding Capital Pool Companies (CPCs)
A capital pool company is a listed company with experienced directors and capital, but no commercial operations at the time of the initial public offering (IPO). The directors of the CPC focus on acquiring an emerging company and, upon the completion of the acquisition, that emerging company has access to the capital and the listing prepared by the CPC.
Canada does not have as robust of a venture capital industry as the United States does, so companies tend to list on the TSX earlier in their growth. The downside of this earlier listing to access capital is that the companies can easily end up abandoned by investors. This is due to their inexperience in operating as a public company and the dual demands of the public responsibilities at a point of critical operational expansion.
Capital pool companies were created and promoted to inject early-stage companies with both the capital and expert director-level guidance that is provided in the U.S. by venture capitalists. They also provide an alternative growth path for Canadian businesses as well as businesses interested in going public on the TSX Venture Exchange. Capital pool companies are similar to blind pools in the United States, but the process is controlled and regulated by a single Canadian exchange.
How does a Capital Pool Company (CPC) Work?
A unique listing platform for seasoned management teams with demonstrated public financing skills, together with development companies needing capital and management know-how, is offered by the TSX Exchange Capital Pool Company (CPC) scheme. Capital pools list start trading without an operating company as opposed to traditional public corporations. The aim is to find and buy a promising early-stage company and its treasuries are expressly funded for the quest and due diligence process. In the case where a CPC cannot complete its qualified transaction in the prescribed time period of 24 months of listing, it may run a risk of a trade suspension or delisting from the TSX-V.
The Story Behind Capital Pool Companies
After acquiring the Canadian Venture Exchange in 2001, the program was structured by TMX Group, based on the Alberta Stock Exchange's previously offered junior capital pool program. TMX Group is, in its own words, an "integrated, multi-asset class exchange group" - the largest exchange group in North America by a number of listed companies with equity and derivative markets and clearinghouses, including the TSX and the TSX Venture Exchange (TSX-V). The latter, partially owing to its lower listing costs and simpler regulatory requirements than US and European exchanges, is home to many rising junior firms. The program provides access to markets for young companies with the assistance of seasoned managers and officers, amongst other items, to the TSX-V.
The CPC Process
The process of creating a capital pool company has two phases:
● Phase 1: Creation of the Capital Pool Company In phase one, at least three experienced individuals pool capital to begin the process—the total amount must exceed $100,000 or 5% of the funds being raised. The founders then incorporate a shell company for the purpose of raising seed capital with the intention to list it as a CPC. The prospectus is created and then the company applies to be listed. There are additional rules as to how many shareholders are required and how much they can own of the offering. The CPC is listed at the end of this process with the symbol ".P" to designate it as a capital pool company.
● Phase 2: Completing a Qualifying Transaction Within 24 months of listing on the TSX, the capital pool company must complete a qualifying transaction or face delisting. The qualifying transaction is an agreement to purchase a company and incorporate its shares into the public company, similar to a reverse takeover. The end structure results in the founders of both merged entities maintaining a higher level of ownership in the company than what may have been the case with an IPO.
Essentially, having a ready-made listing with experienced directors helps to lower costs for the company and reduces the risks of going public. For investors, deciding to purchase shares in a CPC requires more due diligence on the founders of the CPC itself, as they will be deciding what type of business to buy and how to guide it after the initial investment is made.
Even if a target has been suggested, as is the case with some CPCs, there is no guarantee that it will happen. So, investors must be confident in the management of the CPC and their ability to create value for businesses in general rather than a specific business.
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